The Appraisal Conundrum

With the recent dip in interest rates many homeowners are rushing to refinance only to come upon a very large obstacle, appraised values of their homes are coming in low…very low. The biggest reason being that there are not enough comparable property sales in the past 3 months to set lenders nerves at ease. Perhaps you are having better luck than this, but we personally have had clients call and ask how this little problem might be alleviated.

So what can you do? Hopefully “the banker” will chime in with a little insight from that of the lender, otherwise, we’d suggest contacting your Realtor, asking for as many comparable sales as they can come up with, talking to your appraiser, taking them golfing or to lunch, buying them nice bottles of wine, and getting them backstage. If that doesn’t work, the most simple advice we can give is an old saying, “If at first you don’t succeed, try, try again.” There are many appraisers out there, and there are many mortgage brokers (okay, not as many as there were) that will do what they can to earn your business. Shop around, find the broker that will not only get you the best rate, but also get the deal done. Keep in mind, sales that happened as little as six to nine months ago may really not apply depending on your property. Yes, the market has changed that much, that fast, in some parts of San Francisco. Others…not so much.

Do you, the reader, have a recommendation for a broker that you recently used? Did you have this same problem and how did you get around it, if at all? We’d love to hear your stories and thoughts, because we’re all in this together and we can all learn from each others mistakes and triumphs, so share the goods. You know we’d do the same.

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11 comments

I used Pete Elting at GMc. Both for my purchase in 07 and recent refi.
bought a multi unit for $1.3 in 07, just had it appraised for $1.25 – so could have been worse. it’s in Noe.
Definitely recomment Pete, he got us a rate of 4.875%, 30yr P&I with two points – which I think is good for a multi unit – certainly enough to make the property cashflow positive.

This is a very interesting post. . .and perhaps the biggest obstacle as borrowers have been attracted by the historically low interest rates. The banks’ toughest challenge is attempting to determine what fair value actually is. In San Francisco, with so few sales, and sellers that are truly desperate. . .there just isn’t enough activity to derive a “real” value.
I think in the future, there will adjustments to the method in which homes are appraised. . .but for now, you may need to wait on the sideline until a property down the street either gets listed or sells.
In terms of paying points. . .brokerism. . .I think this is an outdated procedure and frankly a waste of money. The numbers just don’t make sense. How much savings in rate/payment could you really save if the rate cost 2 points?
My advice. . .
Watch comparable sales.
Ask what type off add-ons banks charge for higher Loan to Values, it may not be as much as you think.
Consider that Values may still drop, refi now if you can and the rate/payment meets your expectations.
Work with professionals and accept the advice of your realtor. . .
Hope this helps.

as far as the points comment, I think this depends on a case by case, with expected holding time crucial.
yes, 2 points isn’t cheap, but to get 4.875%, and make a rental cashflow postive, this in itself increases our likely average holding period.
the points breakeven hold was about 2 years – how can this be considered a waste of money if I intend to hold beyond this?

The point I am trying to make, and by no means do I, or, anyone know for sure. But that rate of 4.875% may be free at some point in the future. . .if this is in 6 months, then you did not break even. Again, my advice is take a payment/fee/rate structure that you can live with. In my world these days, it is one loan at a time. . .borrowers are like snowflakes.

My opinion is that we will continue to see rates at costs that are lower than once imaginable. In the case aforementioned. 4.875% cost 2 points. . .perhaps same loan will cost zero points. . .
The same issue continues though. . .who can qualify for a loan and whose property has retained the value.

Well, we had our reasons for jumping in now.
My wife wants to change jobs for example, and she has a really strong bonus history with her current firm which we can use to qualify for the loan. This may not be the case if she changes jobs.
we are taking advantage of the (temporary) higher conforming loan limit for 2 unit buildings ($800k). the limit for SFHs (625k?) is also temporary.
home prices are starting to come down significantly and quickly in SF itself so it will be harder to pass the appraisal in six months to a year as compared to now.
So, the first two reasons are personal, but the third applies to everyone. why wait and wait and wait and risk (in our case) missing out on a rate decrease from 6.5% to 4.875?

In my opinion valuating properties should be left to the professionals that were trained to valuate…the appraisers. I don’t think it would be wise to take an appraiser out for drinks and such (and besides ..who wants the FBI breathing down your back?) because this might affect the appraisers standing with being unbiased.

The appraiser will determine what comparables to use regardless of how you approach the situation. A lack of comparable sales?
-Take one older sale and make a time adjustment.
-Take a newer sale that is not so like the subject and make higher adjustments.
-Take a sale that was farther away, but that is more like the subject in many ways and make a location adjustment for it.
Mix these together for a more rounded and justified value is sometimes good if the situation permits. But ultimately, the Appraiser usually has just as much (if not more) information available than a mortgage and real estate broker and is better equipped to determine the best market data to utilize. Many times an appraiser will go way beyond just looking at a listing to find out why something sold so high or low. With this in mind, work with what you got, what else can you do?

I have a question regarding the appraisal. Our lender says that we cannot refi because we cannot have an appraisal if our house is not pristine-clean.
We believe that the appraiser can appraise whatever is there – including if the kitchen is half open and missing everything (and make a price adjustment for the kitchen remodel in the appraisal).

So true? untrue? do we really need to finish the remodel before the appraisal? (note: we don’t care about the underpricing due to remodel – it won’t impact the loan amount either way [ ltv < 50% ] )